Disinvestment in India

Why in news?

• The government is eyeing a sale of its residual stakes in erstwhile public sector firms like Paradeep Phosphates, Hindustan Zinc and Balco, which were privatised during the Atal Behari Vajpayee regime, a top finance ministry official said.
• The government still owns 49% stake in aluminium producer Balco and 29.5% in Hindustan Zinc, with the latter’s sale held up since 2016 following a Supreme Court stay.
• With both the firms staying highly profitable after the transfer of management control to a private player, these stakes could yield a significant bonanza for the exchequer.
• Expressions of interest were expected to be invited soon for the sale of Container Corporation of India (CONCOR), once the government framed a land lease policy for the firm’s holdings, Mr. Pandey said.
• The IDBI Bank sale process had also begun.
• Government intends to complete the privatisation of Air India, BPCL, Shipping Corporation of India, BEML, Pawan Hans and Nilanchal Ispat Nigam Limited. These are the transactions where we have got sufficient interest from bidders and are now completing the second stage of the due diligence and financial bidding,” he informed.
• On asset monetisation, the Secretary said GAIL was likely to come up with an offering soon through the Infrastructure Investment Trust (InvIT) structure, though there were still some pending structural issues that needed to be smoothened as per the learnings of the maiden InvIT from PowerGrid Corporation. More airports would also be offered as public-private partnership ventures, he added.

What is Disinvestment?

• By disinvestment we mean the sale of shares of public sector undertakings by the Government. The shares of government companies held by the Government are earning assets at the disposal of the Government. If these shares are sold to get cash, then earning assets are converted into cash, So it is referred to as disinvestment.
• Disinvestment also refers to sale or liquidation of an assets or subsidiary of an organization or government but on any condition Government’s share should not go below 51%.
• It is done by Dept of Investment and Public Asset Management (DIPAM), Ministry of Finance from 2016.

Disinvestment Policy of India

• Industrial Policy Resolution, 1956 talks about the growth of the country through PSUs. Hence, from 2nd Five Year Plan we started focusing on PSEs.
• PSUs are wealth of Nation and it ensures that wealth rests in hands of people, promote public ownership of CPSEs.
• Govt must retain at least 51% of shareholding and management control of PSUs.
• Strategic disinvestment by way of sale of substantial portion of Govt in identified CPSEs upto 50% or more along with transfer of management control.

Phases of Disinvestment

• Phase I: In 1991 PVNR Govt initiated disinvestment: In 1991 policy it was announced that government would disinvest upto 20% of its equity in selected PSUs mainly through Mutual Fundss and FIIs (Financial institutions investors).
• Phase II: More people allowed in disinvestment like FII, Employees of the Company etc.
• Phase III
  1. The Govt appointed C Rangarajan Committee: who recommended ~49% of disinvestment.
  2. Atal Bihari Vajpayee adopted major disinvestment policy Paradeep Phosphates, Hindustan Zinc and BALCO. It talked about Stake Sale.
  3. Stake sale is a larger share that can be sold to LIC or other profitable PSUs not individual investors.
  4. PSUs were bifurcated into 2: Strategic (defense, atomic) and Non strategic.

Phase IV: Current Disinvestment (Budget 2021-22)

• The government budgeted Rs. 1.75 lakh crore from stake sale in public sector companies and financial institutions, including 2 PSU banks and one insurance company, in the next fiscal year.
• Unveiling the PSE policy in Budget 2021-22, Finance Minister Nirmala Sitharaman said barring four strategic areas, public sector companies in other sectors will be divested. The policy would give a clear roadmap for disinvestment in strategic and non-strategic sectors.
• She said strategic sale of IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd, among others, would be completed in 2021-22 fiscal year beginning April 1.
• Also legislative amendments required for LIC IPO would be brought in 2021-22. LIC was established in 1956 through an Act of Parliament. Before Govt divests a part of its stake through a public issue, it will have to ensure that it amends the LIC Act, which ensures a sovereign guarantee for all policies under Section 37 of the Act.
• She said NITI Aayog has been asked to work on next list of central public sector companies for strategic disinvestment.
• Sitharaman said a revised mechanism for fast-tracking closure of loss making PSUs would be worked out and an incentive package would be developed to incentivise states to sell stake in state PSUs.
• To monetise lands owned by CPSEs, a special purpose vehicle (SPV) would be developed.
• Finance Minister Nirmala Sitharaman had in her previous budget for 2020-21 set a target of raising Rs. 2.1 lakh crore from privatisation and sale of minority stakes in state-owned companies. This include Rs. 1.20 lakh crore from selling stake in CPSEs and Rs. 90,000 crore from stake sale in financial institutions.
• So far this fiscal, the government has garnered Rs. 19,499 crore through minority stake sale in CPSEs and share buybacks.

Strategic Disinvestment Policy for PSEs

• The policy, promised as part of the Atma Nirbhar Bharat package, states the government will exit all businesses in non-strategic sectors, with only a ‘bare minimum’ presence in four broad sectors.
• These strategic sectors are —

1. Atomic energy,
2. Space and defence;
3. Transport and telecom;
4. Power, petroleum, coal and other minerals; and
5. Banking and financial services.

• It will help the exchequer stop throwing good money after bad, and funnel it into more productive endeavours.

Bharat Bond ETF (Exchange Traded Fund) to be India's 1st Corporate Bond ETF

• An Exchange Traded Fund (ETF) is a type of fund that owns the underlying assets and is divided into different shares.
• It is a marketable security (in the form of shares) that contains a slice of cumulated shares/bonds/commodities/foreign currencies that is sliced into different shares (as in case of mutual funds).
• The government has decided to use ETF mechanism to disinvest the shares of public sector companies.
• These units can be listed in the stock exchange as ETF and can be traded like ordinary shares.
• The advantage is that listing and trading in stock exchanges gives tradability (easy for buying and selling) to the ETF shares.
• ETF to comprise basket of bonds issues by CPSEs, CPSUs, CPFIs and other government entities and all will be initially rated AAA with Rs. 1000 for each unit to attract retail investors.
• Each ETF will have a fixed maturity dates initially to be issued in 2 series of 3 years and 10 years.
• Benefits of ETF
  1. Bond ETF will provide safety (issued by CPSEs & govt owned agencies), liquidity (tradability on exchange), additional source of funding for issuers (apart from banks) and predictable tax efficient returns.
  2. It would help deepen India's bond market as it will encourage participation of those retail investors who are currently not participating in bond markets including HNI participants.
  3. Retail and institutional investors will easily trade this ETF shares as the ETF has high liquidity as in the case of ordinary shares.
  4. For the government, ETF route will help to avoid the cumbersome exercise of several IPOs (Initial Public Offerings). Otherwise, each PSU disinvestment necessitate separate listing or IPOs. Similarly, investor participation will go up.

Difference between ETF and Mutual Funds

• Mutual fund is like an ETF as it is a unit that comprised of equities of different companies.
• But ETF and mutual funds differ with respect to tradability.
• Mutual Fund selling price will be the price of shares at the close of the day. On the other hand, shares of ETF are traded throughout the day.
• And at any moment, ETF can be bought and sold.
• In this respect, ETFs have more liquidity and marketability.
• Another difference is that Mutual Fund is managed by a financial company and its fund managers; whereas the ETF is managed by the investor himself (unless deputed).